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Experts: Effect on store valuations is uncertain

Volkswagen's settlements of its diesel emissions cheating scandal likely will spark increased VW dealership buy-sell activity, but the impact on valuations is less certain. That depends on how the deals affect dealership profits, said buy-sell advisers.

"You'll see an increase in the number of stores that trade hands because now it's clearer on what will happen," said Alan Haig, president of Haig Partners, a dealership buy-sell advisory firm in Fort Lauderdale, Fla. "Some dealers will give up on it and sell. Others will be optimistic and want to buy."

But he warned, "That doesn't mean the franchise value will increase."

Buy-sell adviser Bob Morris agreed.

"Before the scandal, VW stores were not a hot franchise, unlike Toyota. When [Toyota] had the floor mat and tsunami issues, that franchise was hot and rode out the problems and never looked back," said Morris, the Southeast director for Tim Lamb Group.

VW will spend $15 billion under settlements with car owners, the federal government and many states. Included is up to $10 billion for customer buybacks, early lease terminations and customer restitution payments.

In part because the settlements could spur new- and used-vehicle sales, as well as service business, some buy-sell advisers said the deal could boost valuations for VW stores eventually.

"This will start to cleanse the brand of the scandal and you will start to see improvements in the franchise value," said Erin Kerrigan, managing director of Kerrigan Advisors in Irvine, Calif. "Dealers say there is pent-up customer demand."

Buy-sell adviser Mark Johnson said VW will probably "pound incentives" for a long time, drawing in customers and inflating dealership revenues.

"They'll be back in the mix of value of any other import store," said Johnson, president of MD Johnson Inc. in Seattle.

Johnson believes the settlements will now dissuade some VW dealers from selling.

"All those losses they took over the past few months, they'll earn back," Johnson said. "A seller won't sell unless they get some kind of a premium over what the market is offering currently."

But buy-sell adviser Sheldon Sandler said the settlement is not a cure for poor values.

"It's about risk-reward," said Sandler, managing partner at Bel Air Partners, a buy-sell advisory firm in Hopewell, N.J. "VW will recover, consumers have short memories and there are parties who are buying VW dealerships now because the risk-reward is favorable. But they're not going to pay substantial multiples."

Dealer Clay Cooley, owner of Clay Cooley Auto Group near Dallas, bought two VW stores near Dallas in mid-March. He is "tickled pink" about VW's settlements because the news is good for business, Cooley said. His VW stores sold about 250 new and used vehicles last month, he said.

Cooley wants to buy more VW stores, and is monitoring prices.

But a dealer in an eastern market said his VW valuations have dropped by at least 70 percent. He wants to keep his stores, though he doubts he'll recoup years of losses, which he estimates top $1 million.

"It's clear what VW is doing for the customer," that dealer said, "but it's unclear what the result of it will be."